Form PF Update: GRMA’s Recent Experience with “First Filers”, “Second Filers” and “Third Filers”
December 7, 2012
GRMA’s Experience With November Form PF Filings
At the end of November, hedge fund advisers with Regulatory Assets Under Management (“RAUM”) of $5 billion or more had to make their second Form PF filing. We at Global Risk Management Advisors (“GRMA”) want to take this opportunity to update you on our recent experience working with some of the largest first filers, as well as with advisers with lower RAUM that will be making their initial filings early next year.
First Filers: for the just-completed November 29 filing, GRMA found that “first filers”
(funds with RAUM of $5 billion or more) focused their work in three areas: 1) improving
workflows to make their Form PF process more efficient; 2) putting in place enhanced
documentation and regulatory audit trails; and 3) implementing reconciliations and other
controls to make their process more sound and sustainable.
GRMA’s Recent Experience With First Filers: From working with large first filers on their
recent November filings, we have observed that many funds are still struggling with the
proper interpretation of the questions, assumptions and methodologies for their risk
calculations. In addition, because of the legal, regulatory and investor implications arising
from Form PF, we have found that both our current and prospective clients have a strong
interest in our review, check and audit services before they submit their filing to the
regulators.
Second Filers: many “second filers” (advisers with RAUM between $1.5 billion and $5
billion) are, remarkably, still evaluating how they should proceed with Form PF and which
service providers to engage to assist them. The lack of progress of such funds is particularly
surprising because, relative to first filers, second filers generally need greater assistance from
service providers.
GRMA’s Recent Experience With Second Filers: We have found that our second filer
clients typically fall into two camps:
1. Soup to Nuts: Because many second filers have limited internal resources, these
funds want GRMA to assist them with their entire form PF process, including: project
management for data aggregation and production of the XML upload file;
interpretation, assumptions, risk methodologies/calculations and answers for Form PF
questions; process and controls; and our review, check and audit of their filings
before submission.
2. Heavy Lifting: Second filers in the other camp want GRMA to assist with the
“heaviest lifting” of Form PF, specifically interpreting the questions on Form and
developing assumptions, risk methodologies/calculations and answers and performing
our review, check and audit of their filing before submission.
Third Filers: “third filers” (funds with RAUM between $150 million and $1.5 billion), have, in many cases, just begun to think about Form PF. Although third filers only have to complete Section 1 of Form PF, we have found that a large number of third filers are being too complacent and are underestimating the amount of time that they will need to develop a sound and sustainable process for Form PF reporting.
GRMA’s Recent Experience With Third Filers: Even though third filers are only required to
complete Section 1 of Form PF, they are finding that they would benefit from GRMA’s
guidance in interpreting the more complex questions and developing assumptions and
answers for these questions. Like both first and second filers, third filers recognize the value
of having GRMA perform an independent review, check and audit of their filings before
submission because of the substantive and optical value of our review. They also consider it
to be good, inexpensive insurance.
“Test Filing”: We have noticed that many second filers have been misled into doing a “dry run” of their Form PF filing with their administrator at the beginning of their Form PF process. In our experience, it is crucial that a fund determine the interpretations, assumptions and methodologies needed to develop valid Form PF answers before attempting to do a test filing. Fund administrators do not have expertise in these aspects of Form PF and do not want the liability associated with making those decisions for a fund. They simply help populate the form and produce the XML upload file. Some administrators will, in certain instances and on a no-names basis, provide feedback as to interpretations, assumptions and/or methodologies being used by some of their other clients. We strongly advise funds that it is unwise to rely on such “blind” comparisons with other, unknown, funds. Indeed, the regulators have been clear that decisions regarding interpretation, assumptions and methodologies belong to the fund manager and should be made based on diligent analysis of what is appropriate for the fund. We believe a fund’s first and foremost objectives should be to get the Form PF content right and to develop a sound, sustainable and repeatable process with appropriate documentation and audit trails. An administrator or a Form PF software provider cannot provide these services to a fund—only GRMA provides these services.
“Heavy Lifting” for Form PF
There is a common misconception that Form PF is just about data aggregation. The “heavy
lifting” for Form PF goes beyond just data aggregation and includes:
• Interpretation – interpreting the questions in Form PF in the manner intended by the
regulators.
• Assumptions, Risk Methodologies/Calculations and Answers – developing key
assumptions, risk methodologies and calculations and answers required for the complex
and ambiguous questions on Form PF.
• Project Management – managing the process of extracting, normalizing, aggregating and
transforming the data required to develop answers for the questions on Form PF and
producing the final Form PF XML upload file.
• Sound Risk Approach and Processes – ensuring a fund’s risk management approach and
processes are sound and will “show well” to regulators and investors.
• Consistent Risk Representation – ensuring that a fund represents its risk consistently
across its external-facing documents (e.g., Form PF, PPM, DDQs, investor
communications).
• Final Review – reviewing the final Form PF submission file to ensure that it reasonably
and accurately reflects the risk profile of the fund and does not raise any regulatory or
investor “red flags.”
Why GRMA?
What sets GRMA apart for Form PF is that we combine our extensive risk management expertise
and thought leadership on Form PF with leading Form PF data aggregation technology* to provide
our clients with:
• Complete and Cost-effective Solution – a complete and cost-effective initial and ongoing
solution for Form PF that is sound, repeatable and sustainable.
• Interpretation – expertise to provide much needed interpretation and guidance for the
questions in Form PF.
• Evaluation/Development of Assumptions, Risk Methodologies/Calculations and Answers –
experience to evaluate and/or develop key assumptions, risk methodologies & calculations
and answers required by Form PF.
• Project Management – expert project management to provide a “general contractor” for the
entire Form PF process.
• Enhanced Risk Management – enhanced risk management as it relates to Form PF.
• Consistency – more consistent risk representation across all fund documents.
• Essential Final Review – an independent final review, check and audit of a Form PF filing
before submission to the SEC.
• Independence – substantive and optical value for investors and regulators, from our role as
independent risk experts.
* Data aggregation technology provided in conjunction with one of GRMA’s software partners or a fund’s administrator.
To view the full PDF of the update, please click here.